In San Francisco, most landlords barely keep up with maintenance on their properties because the rents collected do not offset the ever-growing maintenance costs. The average building in San Francisco is over 120 years old. As properties age, the wear and tear on these buildings will only continue, resulting in even worse living conditions in these rental properties. Per a recent white paper by Val Werness, there are a few states in the country that prohibit rent control because “… the state courts [found] that a rent control ordinance is constitutional only if landlords are not deprived of a just and reasonable return on their rental property.” California is not one of those states, and the city continues to pass more ordinances to landlords’ disadvantage.
San Francisco has a rent-control mechanism that limits the rent landlords can charge for their properties. By controlling rents in these units, the reduced mobility from tenants means that even those who should consider moving on, end up being trapped into not wanting to give up their units. In fact, many tenants, even sublet their units making profits that are staggering compared to what their landlords make. The end result is that most landlords never see their rents increase and are trapped in buildings where any major repair can easily wipe out their finances.
A KQED News article cited an eighteen-year Stanford University study that found some landlords, frustrated by challenges operating their rentals in San Francisco, left the rental business by selling properties or converting them to other uses.
Of California’s 482 municipalities, 15 of them implement a current form of rent control. This equates to approximately 20% of the state’s housing units and ¼ of the rental units. Research has shown that cities with rent control experienced significant drop in new construction, as well as a continued housing shortage, a further reflection of the poor economic dynamics from such controls
Despite the challenges, more regulations continue to be added to further constraint San Francisco’s landlords. In fact, this April 2018, the city introduced a bill to eliminate what many housing rights advocates called an unjust loophole in the city’s rent ordinance that allowed landlords to raise rents to pay for increased loans and taxes. In many cities, when the costs of operating and maintaining an apartment building outpace the annual allowable rent increases set by the city’s Rent Board, landlords may request permission to pass on some of those expenses to tenants.
Hence many landlords disagree with the city’s position. This so-called loophole only allows landlords a permanent increase of 7%. In a city where long-term tenants, who have lived in their units more than 15 years, pay an average of only $1,250-$1,500, this increase is less than a $100 per month. The proposed bill ignores the facts that the new owners face higher mortgages and property taxes when owners sell because they cannot maintain their operations, or, more commonly, because of difficult tenants and dealing with rent control. Further, the increased revenues from this higher property taxes enable cities to pay for infrastructure, parks, and schools, that in fact benefit most of these same tenants.
In passing the new law, the city’s politicians felt that owners’ passing on the expenses of paying loans and property taxes was “unfair” and as one supervisor stated, “doing so does not improve the property and only makes a corporation richer”. This is a mockery to many of the mom and pop owners in San Francisco, whom Ms. Kihagi points out, are barely making in a month even the median income for the city of San Francisco.
A simple illustration of the true economics would shed more light. An average building with 4-6 units requires numerous repairs throughout the year. Replacing a fridge costs approximately $1,000, while a blown water heater could cost $5,000. With average rent-controlled renters paying only $1,250-$1,500/month, such a building operates with less than $100,000 in income annually. Factoring in items like property taxes of $10,000, utilities of $7,500, and mortgage payments, the landlord is left with perhaps a $25,000 return per year on their investment.
Rent control was created to aid residents who needed it; however, it is now an outdated system. San Francisco is by far the worst attitude towards its owner. In a city where more than 70% of voters are renters, politicians quickly gain popularity by supporting legislation that harms landlords. This myopic ignorance of the landlords’ side will continue to damage the city and its housing market. Delipidated buildings will make it less attractive to both potential residents and employers, resulting in a poorer standard of living.
For more information on Anne Kihagi and West 18 Properties, please visit http://annekihagisf.com/.Wake up Right! Subscribe to our Morning Briefing and get the news delivered to your inbox before breakfast!